One of the hardest parts of stock selection is where to begin. Fortunately, we have GuruFocus to help. Let the best-of-the-best do the ground work for us. As we sift thru this information and find a company we like, the next question is: Is this firm a good value? Most of our Guru's here are 'value-driven' i.e., they prefer companies selling below what it is probably worth if it were to be bought outright and made into a private company or is a solid firm that has come across temporary bad times.
by Craig Thomas
Now that we found an interesting company, what next? How do we calculate this mythical 'intrinsic value'? How do we know if it is a 'good deal' ? Here is a checklist that has worked quite well for me;
1- Is the industry growing? Do some research on the internet in regards to both the past performance of the industry and a likely future growth projection. If the outlook is good, proceed.
2- Is this company the industry's 'Best-in-Breed'? I believe you have to compare financials from all of it's competitors. I print them off from the 'Key Statistics' page on Yahoo. Line them up, rank them in 4 categories. ROA, ROE, Net profit % , 5 year EPS growth.
If your company is not one the top ranked companies in ANY of these, then beware: it may not be such a great deal. If it is not be the best company in it's own industry, how can it be the single best company for you to put your money in? If it does stand out near the top in all 4 categories, proceed further.
Example given:
Back in 2004 Norfolk Southern was selling @ $20/ea.
Yet, out of the 4 major railroads, it may have been 4th in sales, but it ranked 1-1-1-2 in the basic 4 fundamentals. Now it hovers near $50. Norfolk has benefited from the increased demand in coal and has the efficient company structure to turn that demand into profit.
3- Does this firm offer anything proprietary? If not, what is unique, different, or better about it? Do your due-diligence, call Investor relations, call or e-mail the CFO if you have to, I do. Find out exactly what this company offers to it's customers that separates them from the pack. How a company stands out will determine it's fate. In the case of Norfolk , they have major market-share in coal transport.
4- Read the last two or three of their 10k annual reports. Also read as many 8's as you have time for. It never hurts to read the competitors reports either, it makes for great comparison. Read section One and section Seven entirely and skim the rest. In my opinion, if you don't read Section 1 and 7 from the 10K's you might as well let a stranger play with your money.
These are the basic tenants of fundamental evaluations. It offers a good deal of insight into the fundamental nature of a company which ultimately helps project future earnings and it's overall direction.
____________________
Craig Thomas graduated from Davenport University in 1993 and has been a financial analyst since. He is recognized by the investing community as a successful small-cap locator and has an equal following for his work on achieving accurate intrinsic valuations of the larger caps. Mr. Thomas authored 'The Ultimate Sales Weapon' in 2001, which described the Sales and Marketing methods of industry leaders and how these methods fuel growth. He is presently the owner of NYSE Consultants, a research firm in Michigan.
by Craig Thomas
Now that we found an interesting company, what next? How do we calculate this mythical 'intrinsic value'? How do we know if it is a 'good deal' ? Here is a checklist that has worked quite well for me;
1- Is the industry growing? Do some research on the internet in regards to both the past performance of the industry and a likely future growth projection. If the outlook is good, proceed.
2- Is this company the industry's 'Best-in-Breed'? I believe you have to compare financials from all of it's competitors. I print them off from the 'Key Statistics' page on Yahoo. Line them up, rank them in 4 categories. ROA, ROE, Net profit % , 5 year EPS growth.
If your company is not one the top ranked companies in ANY of these, then beware: it may not be such a great deal. If it is not be the best company in it's own industry, how can it be the single best company for you to put your money in? If it does stand out near the top in all 4 categories, proceed further.
Example given:
Back in 2004 Norfolk Southern was selling @ $20/ea.
Yet, out of the 4 major railroads, it may have been 4th in sales, but it ranked 1-1-1-2 in the basic 4 fundamentals. Now it hovers near $50. Norfolk has benefited from the increased demand in coal and has the efficient company structure to turn that demand into profit.
3- Does this firm offer anything proprietary? If not, what is unique, different, or better about it? Do your due-diligence, call Investor relations, call or e-mail the CFO if you have to, I do. Find out exactly what this company offers to it's customers that separates them from the pack. How a company stands out will determine it's fate. In the case of Norfolk , they have major market-share in coal transport.
4- Read the last two or three of their 10k annual reports. Also read as many 8's as you have time for. It never hurts to read the competitors reports either, it makes for great comparison. Read section One and section Seven entirely and skim the rest. In my opinion, if you don't read Section 1 and 7 from the 10K's you might as well let a stranger play with your money.
These are the basic tenants of fundamental evaluations. It offers a good deal of insight into the fundamental nature of a company which ultimately helps project future earnings and it's overall direction.
____________________
Craig Thomas graduated from Davenport University in 1993 and has been a financial analyst since. He is recognized by the investing community as a successful small-cap locator and has an equal following for his work on achieving accurate intrinsic valuations of the larger caps. Mr. Thomas authored 'The Ultimate Sales Weapon' in 2001, which described the Sales and Marketing methods of industry leaders and how these methods fuel growth. He is presently the owner of NYSE Consultants, a research firm in Michigan.
